NovaStar nailed?

Commentary: Also, Portfolio Recovery's CEO, Tempur-Pedic

By

HerbGreenberg

SAN DIEGO (MarketWatch) -- How 'bout that NovaStar?

Here the company doesn't just tell you the day of its earning release, but the hour. Yet when the hour came around on Thursday -- 4 p.m. ET -- there was no earnings release. There wasn't one at 5 p.m., either. Or 6 p.m. Or 7 p.m. Or 8 p.m. Or 10 p.m.

No, there wasn't anything until 12:41 a.m., when the sub-prime mortgage lender, which is structured as a REIT, let loose with a bombshell: It was delaying earnings until it could get an opinion from its tax counsel "to support certain tax positions of the company."

It appears at the last minute its auditors stumbled on something that, according to NovaStar
NFI, -0.93%
will take two to four weeks for its tax counsel to answer. Two to four weeks?

Doesn't take a tax genius, which I am not, to know this is no ordinary tax situation. And tax situations are not what REITs want to have, especially when they pay out the kind of big dividends that have made NovaStar so popular for so long with so many investors -- not to mention an ongoing saga in this column for more than three years.

REITs must pay out 90% of their taxable income in the form of a distribution to shareholders. NovaStar has previously warned that the IRS is looking into issues that could wind up reducing its taxable income and, therefore, its dividend.

But short-sellers and accounting critics have been arguing that there are tax issues related to the complicated structure of a REIT, including questionable transactions between NovaStar and its taxable REIT subsidiary designed to maximize taxable income at the REIT.

Furthermore -- and perhaps more disconcerting -- are concerns by the naysayers that the company may not meet certain IRS rules for REIT status.

Is the tax issue in question one of these? None of these?

Beats me, but I'm thinking of taking bets on whether the company will get an answer and release its earnings within the allotted amount of time.

Bill collector

I've got to hand it to Portfolio Recovery
PRAA, +0.13%
CEO Steve Fredrickson. After reading my recent column about his company, in which I said the company hadn't responded to my inquiries, he shot me an email saying that he and his CFO pride themselves on communicating with investors and the press.

Better yet: Even though earnings will be reported on Tuesday, he didn't hide behind the lame "quiet period" excuse used by so many companies and agreed to an interview to address several issues raised here earlier in the week:

Vaporized receivables: There was concern receivables waiting to be collected but have been wiped out by a recent mad rush to file Chapter 7 liquidation in conjunction with new bankruptcy laws: "Our last earnings call was on October 25 and the new bankruptcy laws kicked in on October 17. We get the vast majority of our bankruptcy filings online day to day. And on the last call we commented we didn't believe there was going to be any material impact on the liquidations of our own portfolios as a result of the spike we had seen."

Falling fundamentals: In recent years there has been a halving of an important metric -- cash collections on owned receivables. Frederickson's answer (and I'm summarizing what otherwise is fairly complicated) is that while he doesn't dismiss the trend, the number is skewed by a number of things, including a change in accounting rules and the mix of its business, but his bottom line: Portfolio Recovery is still meeting its internal targets.

Declining quality: Critics also cite a decline in the quality of bills collected based on disclosures in its receivable portfolios: Frederickson says the ability to collect all pools is based on estimates that tend to be adjusted upward as the years pass.

Pricing of receivables: "There's an upward movement," he says. "There's no way around it. There is more price competition today than three years ago. The only way to deal with that is to make fewer pricing mistakes." Why doesn't Portfolio Recovery have "forward flow" agreements like Rival Encore Capital
ECPG, +0.51%
which keep prices steady for an extended period of time? Frederickson says Portfolio Recovery uses forward flow agreements, but only buys them "when we find them reasonably priced. We have a small amount now, but haven't found any that are compelling enough to enter."

Then I asked about a report earlier this week from Suntrust Robinson Humprey, which highlighted that Portfolio Recovery trades at a hefty premium to its competitors. "The current valuation disparity assumes either that the quality of PRAA's receivables portfolio is twice that of its peers or that its collection expertise is doubly superior (or some combination of the two," the report said. "In our view, this is unlikely."

Frederickson's response: "I don't think at the end of the day any debt buyer is simply worth what their existing book of business is at what is stated on their balance sheet." He thinks he should get a premium for the way he runs his business and communicates with investors.

So far, the street agrees. Let's see what happens after earnings.

Bed-time story

How weird is Tempur-Pedic
TPX, -0.78%
? It reported fourth-quarter results on January 26.

While the company doesn't give quarterly guidance, it did discuss orders (which it said were strong in January) and reminded investors that last year's first quarter was unusually large because of purchase prior to a price increase.

The next day analysts issued reports, with the average calling for an 11% first-quarter sales gain.

A few days later its executives went to the big mattress show in Las Vegas.

Then, nearly a week after the show -- last Monday, to be exact -- Tempur-Pedic issued a press release saying that the analysts were wrong and that the first quarter will only be "up slightly."

Why did it wait so long to offer the clarification, especially when it doesn't give quarterly guidance? Could it be that orders at the mattress show weren't as good as expected?

Let's just say the company has my questions and hasn't responded.

The company did, however, announce that one of its early investors, Friedman, Fleischer & Lowe, has distributed all of its 5.8 million Tempur-Pedic shares to its partners.

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